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What is a Nodal Account?
The most often used payment method nowadays is digital. The foundation of India’s digital transaction ecosystem is nodal accounts. To effectively handle multi-party transactions, a variety of industries, including e-commerce, fintech, education, travel, food delivery, crowdfunding, insurance, and government collections, depend on nodal accounts.
Nodal accounts provide safe, legal, and transparent money movements by serving as a short-term, regulated holding mechanism. Nodal accounts will become even more crucial as India’s digital economy develops further since they promote accountability, trust, and smooth financial transactions across all sectors.
These include a marketplace, payment gateway providers, payment aggregators, etc., that connect consumers to the vendors and hold money on their behalf.
Related Read: What is Payment Gateway and How It Works
These intermediaries hold a certain commission. After that, disburse the rest to entities such as vendors and logistic partners.
Nodal accounts are used in industries where money moves between consumers, platforms, vendors, service providers, and third parties. They facilitate controlled fund management, expedite transactions, and guarantee on-time payments. Below is a list of nodal account-using industries and how they operate within each ecosystem.
- E-commerce or Online Marketplaces
One of the biggest markets for nodal accounts is e-commerce. Buyers and vendors are connected through platforms like Amazon and Flipkart. A customer places an order and makes the payment; the payment is then received in the nodal account, i.e., the intermediary account. The amount is temporarily held until the order is confirmed, the return window is closed, or the order is successfully delivered. Once the order is completed between the customer and merchant, the process starts between the nodal account and the merchant account. The commission is deducted, along with logistic charges and taxes, and then the balance is transferred to the seller. Without the nodal accounts, managing thousands of sellers and daily transactions would be chaotic and risky.
- Payment Aggregators and Payment Gateways
Third-party payment service providers rely heavily on nodal accounts. The process begins when the customer makes a payment by debit or credit card, e-wallet, net banking, or UPI. The payment aggregator collects funds into a nodal account, processes reconciliation, and then settles the funds to the merchant’s bank account as per the terms agreed, in cycles T+1, T+2, etc. A third party segregates merchant funds from the company’s daily operational funds. It helps protect merchants’ payments in the event of company insolvency. It is capable of managing multi-merchant fund distribution.
- EdTech Platforms
EdTech companies often use nodal accounts when they onboard multiple educators or partner institutions. Students pay course fees, which are received in the platform’s nodal account. The platform that handles the nodal account deducts its fees, and the remaining fees are then transferred to the institution or instructors.
- Travel and Hospitality Industry
Travel platforms like MakeMyTrip and Booking.com deal with airlines, hotels, bus operators, and travel agents. Customers book tickets or hotel rooms through an online portal, and then the payment from customers is collected in a nodal account. The platform further verifies the booking made and transfers the funds to the merchant’s account post commission deductions. This process prevents premature release of funds, supports complex commission structures and handles high transaction volumes.
- Food Delivery Services
Food aggregators like Zomato and Swiggy connect every user with restaurants online, allowing customers to order food online. The customer pays the restaurant via the delivery service app, and the funds are deposited directly into the nodal account. And, post-commission deduction, the remaining payment is settled with the restaurant partners.
- Insurance and Financial Services
Insurance aggregators and fintech marketplaces use nodal accounts to collect premiums before forwarding them to insurers. This ensures the premium is properly segregated and the platform complies with regulatory norms.
- Real Estate and Property Platforms
Real estate companies use nodal accounts when collecting payment or token amounts from buyers. The buyers pay the booking amount online, and the funds are transferred to the builders after the confirmation of the agreement. This prevents any potential fraud and ensures controlled fund flow.
- Government and Utility Collections
Nodal accounts are also used by several government service providers and bill-collecting websites. Bill collection and money distribution to the appropriate utility agencies are made easier by digital platforms that are integrated with systems like the National Payments Corporation of India.
Use Cases of Nodal Accounts – Which Sectors Use Them and How?
Nodal accounts are used in industries where money moves between consumers, platforms, vendors, service providers, and third parties. They facilitate controlled fund management, expedite transactions, and guarantee on-time payments. Below is a list of nodal account-using industries and how they operate within each ecosystem.
- E-commerce or Online Marketplaces
One of the biggest markets for nodal accounts is e-commerce. Buyers and vendors are connected through platforms like Amazon and Flipkart. A customer places an order and makes the payment; the payment is then received in the nodal account, i.e., the intermediary account. The amount is temporarily held until the order is confirmed, the return window is closed, or the order is successfully delivered. Once the order is completed between the customer and merchant, the process starts between the nodal account and the merchant account. The commission is deducted, along with logistic charges and taxes, and then the balance is transferred to the seller. Without the nodal accounts, managing thousands of sellers and daily transactions would be chaotic and risky.
- Payment Aggregators and Payment Gateways
Third-party payment service providers rely heavily on nodal accounts. The process begins when the customer makes a payment by debit or credit card, e-wallet, net banking, or UPI. The payment aggregator collects funds into a nodal account, processes reconciliation, and then settles the funds to the merchant’s bank account as per the terms agreed, in cycles T+1, T+2, etc. A third party segregates merchant funds from the company’s daily operational funds. It helps protect merchants’ payments in the event of company insolvency. It is capable of managing multi-merchant fund distribution.
- EdTech Platforms
EdTech companies often use nodal accounts when they onboard multiple educators or partner institutions. Students pay course fees, which are received in the platform’s nodal account. The platform that handles the nodal account deducts its fees, and the remaining fees are then transferred to the institution or instructors.
- Travel and Hospitality Industry
Travel platforms like MakeMyTrip and Booking.com deal with airlines, hotels, bus operators, and travel agents. Customers book tickets or hotel rooms through an online portal, and then the payment from customers is collected in a nodal account. The platform further verifies the booking made and transfers the funds to the merchant’s account post commission deductions. This process prevents premature release of funds, supports complex commission structures and handles high transaction volumes.
- Food Delivery Services
Food aggregators like Zomato and Swiggy connect every user with restaurants online, allowing customers to order food online. The customer pays the restaurant via the delivery service app, and the funds are deposited directly into the nodal account. And, post-commission deduction, the remaining payment is settled with the restaurant partners.
- Insurance and Financial Services
Insurance aggregators and fintech marketplaces use nodal accounts to collect premiums before forwarding them to insurers. This ensures the premium is properly segregated and the platform complies with regulatory norms.
- Real Estate and Property Platforms
Real estate companies use nodal accounts when collecting payment or token amounts from buyers. The buyers pay the booking amount online, and the funds are transferred to the builders after the confirmation of the agreement. This prevents any potential fraud and ensures controlled fund flow.
- Government and Utility Collections
Nodal accounts are also used by several government service providers and bill-collecting websites. Bill collection and money distribution to the appropriate utility agencies are made easier by digital platforms that are integrated with systems like the National Payments Corporation of India.
Why is a Nodal Account necessary?
1. Protects customer funds
Nodal accounts protect the customer from being duped. The customers’ funds go directly into the nodal account instead of the intermediary (like payment gateway/aggregator). This ensures the funds are not misused.
2. Ensures prompt settlements
Nodal accounts also protect the interests of the seller by enforcing T+2 / T+3 settlements.
3. Regulatory compliance (RBI Requirement)
Apart from their benefits, it’s important to understand that nodal accounts are a necessity for intermediaries. Payment and Settlement Systems Act, 2007 states that all payment-related entities must have a nodal account.
4. It enforces transparency
Nodal accounts keep tabs of all transactions. This makes it audit-ready. Additionally, this makes it easier to process refunds, resolve disputes, and detect fraud.
Nodal Account vs Escrow Account vs Current Account
The difference between a nodal and an escrow account in India can get confusing.
Especially since they both act as safeguard places for funds between two parties. Here are the three major differences between them.
On the other hand, current accounts are used to carry out regular business transaction and hence, has a completely different purpose altogether
Differences between Nodal Account, Escrow Account and Current Account
| Feature / Parameter | Nodal Account | Escrow Account | Current Account |
| Purpose of Account | Route payments between buyers and sellers via intermediaries | To hold funds temporarily until pre-defined conditions are met | To carry out regular business transactions |
| Use Case Examples | Marketplaces (Flipkart, Paytm), payment aggregators (Razorpay, Cashfree) | M&A deals, real estate, legal settlements | Salaries, vendor payments, general business ops |
| Ownership | Owned by a business but operated under RBI guidelines for intermediaries | Jointly managed by involved parties under a legal agreement | Owned and operated by a business |
| Regulatory Oversight | Governed by RBI. They have specific guidelines for payment intermediaries | Governed by contract law and banking norms | Follows standard banking KYC norms |
| Control of Funds | Funds must be settled to beneficiaries within a time frame; cannot be used for business expenses | Funds are locked until contract terms are fulfilled | Full control over funds. Funds can be freely used by account holder |
| Is it Interest Bearing? | No | No (usually) | No (though linked fixed deposits may earn interest) |
| Are Third-party Funds Allowed? | Yes. 3rd party funds are held temporarily for onward settlement | Yes. Third party funds are held until contractually released | Not meant for holding third-party funds |
| Operational Restrictions | Highly regulated. Only specific credits/debits allowed for Nodal Account | Fund usage restricted as per escrow agreement | No such restrictions |
| Compliance Requirements | KYC of all parties. Regular reporting to regulators is required. | Agreement-based compliance | Basic KYC and transaction monitoring |
RBI Guidelines on Nodal Accounts
The RBI guidelines for a nodal account in India aim to regulate payments.
Here are the key RBI regulations for nodal accounts that you must be aware of:
1. Nature of Account (Section 3.1)
- Nodal accounts should be regarded as internal accounts of the bank. This is to say that intermediaries can not maintain or operate these accounts directly.
2. Timeline for Compliance (Section 3.2 & 4.1
The settlement to merchants must be prompt and adhere to the following timeline:
If T is the date of transaction completion, then;
- The settlement must be done at or before T+2 if no nodal bank is involved.
- The settlement must be done at or before T+3 if nodal bank is involved.
3. Permitted Transactions (Section 3.3)
Credits
- Payments from customers buying goods or services
- Transfers into accounts based on pre-determined terms and conditions
- Refunds for failed or disputed transactions
Debits
- Payments by a marketplace to various vendors
- Transfers based on pre-determined terms and conditions
- Transfers representing refunds for failed, disputed transactions, requested
- Commissions to the intermediaries at pre-determined rates
4. Audit Requirements (Section 6.1)
There is a need to supervise the functioning of these accounts. Hence, RBI mandates a quarterly audit for them. Banks must conduct concurrent audits of nodal accounts. A quarterly certificate confirming compliance must be submitted to RBI’s Department of Payment and Settlement Systems.
Audits have to be submitted within 10 days of the end of each quarter.
RBI guidelines mention transferring funds from these accounts within 2 working days. However, many times it might not be convenient to do so, even for the vendor. In such cases, the marketplace, the payment service provider and the vendor may get into an agreement.
This agreement allows holding the money for a longer duration in the account. This may be justified with due reason in the audit report.
5. Restrictions
- Only commissions may be paid to intermediaries from nodal accounts — at pre-agreed rates and frequencies.
- No other type of payment is allowed to the intermediary from these funds.
6. Applicability Beyond Banks (Section 7.1)
- All authorized payment system operators (e.g., prepaid instrument issuers, card scheme providers) must also ensure compliance.
What are the exemptions to RBI Nodal account regulation?
Section 2. states that Intermediaries that deliver goods/services instantly on payment (e.g., airline tickets, movie bookings) are not covered by this nodal account regulation. This is because they are seen as Delivery versus Payment (DvP) cases.
How Does a Nodal Account Work?
As we mentioned before, a Nodal account serves as a safehouse for funds between two parties.
But how does it work? Let’s try to understand this through the types of credit and debits in these accounts.
Credits
- Payments from customers buying goods or services
- Transfers into accounts based on pre-determined terms and conditions
- Refunds for failed or disputed transactions
Debits
- Payments by a marketplace to various vendors
- Transfers based on pre-determined terms and conditions
- Transfers representing refunds for failed, disputed transactions, requested
- Commissions to the intermediaries at pre-determined rates
There is a need to supervise the functioning of these accounts. Hence, RBI mandates a quarterly audit for them. Audits have to be submitted within 10 days of the end of each quarter.
RBI guidelines mention transferring funds from these accounts within 2 working days. However, many a time it might not be convenient to do so, even for the vendor. In such cases, the marketplace, the payment service provider and the vendor may get into an agreement.
This agreement
How to Audit a Nodal Account in India?
Nodal accounts in India need to be audited by a third-party auditor engaged by the intermediary. The auditor needs to be separate from the accountant who does the regular accounting for the intermediary.
The audit needs to certify 2 primary sets of declarations:
- Payee wise amounts transferred out of the account during the audit period
- Payee wise classification of the closing account balance during the audit quarter
Apart from this exception for cases such as losses due to fraud, chargebacks, pending disputes and refunds may need to be highlighted to justify the closing balance.
Many a time, especially where the accounting may not be very complex, the onus of accounting may be passed on to the bank by paying audit fees. This is negotiated as part of the nodal account agreement with the bank.
How To Open a Nodal Account: A Step-by-Step Guide
Step 1: Confirm if you’re Eligible to open a nodal account
You can open a nodal account if you are a payment aggregator, payment gateway, e-commerce platform, online marketplace, bill payment company, or an intermediaries that collect money from customers on behalf of merchants
If you own a business that instantly delivers goods or services, you are not required to maintain a nodal account. You will be exempted as Delivery versus Payment (DvP) cases.
Step 2: Choose a Partner Bank
Select a scheduled commercial bank in India that offers nodal account service.
Step 3: Equip yourself with Documentation
You will require KYC documents (Company PAN, Certificate of Incorporation, GST, etc.)
- Board Resolution authorizing account opening
- Business model explanation showing you’re an intermediary collecting funds on behalf of merchants
- Merchant agreements showing how you operate as an intermediary
- Nodal account agreement format (as per bank and RBI guidelines)
- Refund and settlement policies
- List of merchant beneficiaries
You may need to sign a Tripartite Agreement that will dictate how funds will flow, settlement timelines, and commissions.
Hereafter, you have to pass the RBI Compliance checks.
Step 4: Account Setup & Activation
Once approved, the bank will set up a nodal account for you as an internal account. Customer payments will be routed to this account. Funds are then settled with merchants within RBI’s timelines. Finally, you have to ensure ongoing compliance of daily reconciliation and concurrent audits by RBI.
Who Can Open a Nodal Account?
It is common practice for intermediaries to open a current account with the bank while setting up the nodal one.
In theory, they don’t require the intermediary’s KYC, since it legally belongs to the bank. However, in practice, KYC will be provided if you are setting up a current account.
Their operations can be challenging. Every step like the addition of beneficiaries and approval of transactions needs bank intervention. It can be a slow, time-consuming process. Also, there is little scope to automate these repetitive functions via an API.
Financial technology companies are solving these problems with their innovative suite of payment solutions.
Easy Split: Automating Repetitive Nodal Account Functions
The huge expansion of the internet-based economy has paved the way for a variety of emerging business models. Marketplace, cab service aggregators, logistics platforms and fintech aggregators to list a few.
The flow of money and its disbursement is a complex process. Hence, we need payment solutions that are a lot more advanced than traditional payment gateways.
If one were to peak into this flow, the system a marketplace invests in would need to handle:
- Collection of payments from end customers through different modes into the account. Businesses prefer not handling money that doesn’t belong to them.
- Defining commissions among vendors, intermediaries and the marketplace
- Taking care of adjustments in payment flow for transaction-specific elements like discounts, chargers, fees, etc.
- Disbursing quick payments from the marketplace to vendors (based on different agreed payment terms) for the supply of goods or services
- Handling marketplace reconciliations
- Meeting all compliance requirements, such as nodal account audits
It would take considerable effort, time and resources for a marketplace or business to implement such a system. that checks all the above-mentioned points. Taking into account this dilemma, Cashfree Payments engineered a solution.
Cashfree’s Marketplace Settlements lets you as a marketplace focus on building your business. And, it takes care of all your collection, disbursal, compliance needs. We provide an elegant, simple and powerful API that your business can leverage on.
Marketplace Settlements Works in 3 Simple Steps
Simplifying Payments:
- Ensures faster settlement to vendors within a T+2 settlement cycle (“T” is the day on which the seller will be notified that the goods have been delivered.)
- Connect your marketplace with Cashfree Payment Gateway to automate accepting and releasing payments in an integrated system
- Works with other payment gateways and even for cash on delivery orders
- Allow international vendors to sell through your marketplace without any hassle, and still, follow a T+2 settlement into the vendors home bank account
- Integrate with our simple and beautiful API’s and get running in under 30 minutes
Helping Finances:
- Cashfree’s Marketplace Settlements runs on Cashfree’s managed nodal account and doesn’t need you to worry about auditing and compliance
- Accept only what you earn into your account, make accounting easy
- Tax computations are faster and simpler by accessing marketplace earnings per transaction
- Know about all your earnings through a detailed report
FAQs
What is Single Nodal Account/ State Nodal Agency?
According to the latest guidelines, any agency that has access to government funds needs to use a single nodal account under Public Financial Management System (PFMS).
Note: The term ‘single nodal account’ is used interchangeably with ‘state nodal account’.
What is the difference between an Inoperative and a Dormant account?
The term ‘inoperative’ or ‘dormant’ account are mainly used for savings/current accounts- not nodal accounts.
It is used to describe bank accounts that have had zero transactions over a span of two years.
However, there are some minimum balance charges on dormant account. Basically, the account holder needs to needs to pay a penalty for the same.
Now these charges will differ from one bank to another. For instance, for HDFC bank, the annual penalty charge is Rs. 10,000 for urban areas and Rs. 5000 for semi urban areas.
Can a Nodal account earn interest?
No, Nodal accounts cannot earn interest.
Can I use a Nodal account for operational expenses?
You cannot co-mingle funds or use nodal funds for operational expenses.
Is there any minimum business volume a business needs to get a nodal account?
Yes, many banks require a minimum business volume to offer a nodal account.
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